Fed cuts stimulus as expected; Bernanke prepares to depart

Jonathan Spicer, Jason Lange

4 Min Read

U.S. Federal Reserve Chairman Ben Bernanke responds to reporters during his final planned news conference before his retirement, at the Federal Reserve Bank headquarters in Washington, December 18, 2013. REUTERS/Jonathan Ernst

WASHINGTON (Reuters) - The U.S. Federal Reserve on Wednesday announced a further $10 billion reduction in its monthly bond purchases as it stuck to a plan to wind down its extraordinary stimulus despite recent turmoil in emerging markets.

Fed Chairman Ben Bernanke, who hands the central bank’s reins to Vice Chair Janet Yellen on Friday, also adjourned his last policy-setting meeting without making any changes to the U.S. central bank’s other main policy plank: its longer-term plan to keep interest rates low for some time to come.

In a statement after the two-day meeting, the Fed said “economic activity picked up in recent quarters,” and largely shook off a surprisingly soft reading on December jobs growth.

“Labor market indicators were mixed but on balance showed further improvement,” the central bank said.

Losses in U.S. stocks deepened after the announcement, while U.S. government debt prices rose, with yields on the benchmark 10-year note hitting the lowest level since late November. The dollar rose against the euro, but fell against the yen.

“The Fed’s action today represents a continuation of its resolute determination to end (bond purchases) during 2014,” said Daniel Alpert, managing partner at Westwood Capital in New York. “The policy has hit its ‘sell by’ date.”

Importantly, policymakers stuck to their promise to keep rates near zero until well after the U.S. unemployment rate, now at 6.7 percent, falls below 6.5 percent, especially if inflation remains below a 2 percent target. Some analysts had speculated the Fed could alter this guidance, given how close the jobless rate now is to the rate-hike threshold.

The decision received unanimous backing from Fed policymakers. It was the first policy meeting without a dissent since June 2011 - a nice sendoff for Bernanke.

The Fed said it would buy $65 billion in bonds per month starting in February, down from $75 billion now. It shaved its purchases of U.S. Treasuries and mortgage bonds equally.

A report earlier this month showed a surprisingly sharp slowdown in job creation in December, but other economic signals - from consumer spending to industrial and trade - suggested the recovery closed out last year on solid ground.

The Fed launched its current round of bond purchases in September 2012. Last month, it decided to begin tapering the program, and the recent signs of economic health had led to a widespread expectation of a further reduction.

Indeed, the Fed’s statement closely tracked the one it issued after its December 17-18 meeting, when it announced an initial $10 billion cut to the program.

At the time, Bernanke said the Fed would likely continue to taper the purchases in “measured” steps until the program was shelved later in the year, as long as the economy continued to heal.

A selloff in emerging market currencies and stocks in recent days, along with the disappointing December jobs report, had led some to speculate that the Fed could put its plans on hold.

The meeting was Bernanke’s last before Vice Chair Janet Yellen moves into the top spot.

He took the Fed far into uncharted territory during his eight years on the job, building a $4 trillion balance sheet and keeping interest rates near zero for more than five years to pull the economy from its worst downturn in decades.

Reporting by Jonathan Spicer and Jason Lange in Washington; Additional reporting by Ann Saphir in San Francisco; Editing by Tim Ahmann and Paul Simao